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# Effect on market equilibrium

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For each of the following changes, show the effect on the demand curve, and state what will happen to the market equilibrium price and quantity in the short run:

a. The price of substitute good rises.
b. Consumer incomes fall, and the good is normal.
c. Consumer incomes fall, and the good is inferior.

If a product's demand function is: Q=30-3p, then calculate the price elasticity of demand when:
a. product price is \$3 using the point elasticity formula.
b. Product price decreases from \$4 to \$3, using the are elasticity formula.

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#### Solution Preview

For each of the following changes, show the effect on the demand curve, and state what will happen to the market equilibrium price and quantity in the short run:

a. The price of substitute good rises - this caused the demand for the other good to increase, as people shift away from the more expensive option. An outward shift in the demand curve will cause the price to fall and quantity to increase.
b. Consumer incomes fall, and the good is normal - people will buy less of a normal good when their incomes fall. A backward shift in the demand curve will result in a higher price and lower quantity demanded.
c. Consumer incomes fall, and ...

\$2.19